Glossary · UK
What is Offset Mortgage?
A mortgage linked to your savings, where the savings balance reduces the loan amount you pay interest on.
Full Definition
An offset mortgage links your mortgage to one or more savings, and sometimes current, accounts held with the same lender. Instead of earning interest on those savings, the balance is set against your mortgage so you only pay interest on the difference. For example, if you owe a mortgage balance and hold savings alongside it, interest is charged only on the net amount, which can shorten the term or lower monthly payments depending on how the deal is structured. A key attraction is tax efficiency: because you are reducing interest paid rather than earning taxable interest, the benefit is not subject to Income Tax, which can suit higher and additional rate taxpayers. Your savings usually remain accessible, giving flexibility that a straight overpayment does not, though withdrawing funds reduces the offset benefit. Offset deals often carry a slightly higher headline rate than standard products, and they tend to suit borrowers with substantial savings relative to the loan. Rates and terms vary by lender, so any benefit should be treated as illustrative and compared carefully. Consider whether a regular mortgage plus a separate savings account might suit you better.
How Offset Mortgage is calculated
Interest is charged only on the net balance:
Interest base = Mortgage balance - Linked savings- Mortgage balance
- Outstanding amount owed on the mortgage.
- Linked savings
- Balance in the offset savings account (earns no interest, but reduces the base).
Worked example: On a GBP 200,000 mortgage with GBP 40,000 in linked savings, interest is charged on GBP 160,000. At 5% that is roughly GBP 2,000 a year less interest than on the full balance.